Flat Rate VAT

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Anybody here registered for the Flat Rate VAT Scheme? I was, but have just deregistered after receiving a letter from HMRC explaining the changes, meant to tackle abuse of the system. A new term, Limited Cost Traders, applies to those who have low overheads, and applies to many of the self employed who primarily provide labour. Can't help thinking it's a bit of an own goal by the tax man, as I can see many small businesses deregistering if their turnover is less than the current threshold of £81k. For example, a contractor charging a company 80k for their services would add VAT at 20%. Depending on their trade sector, they pay a flat rate percentage of the total invoice (Inc VAT), and the difference between the VAT charged and flat rate VAT paid to HMRC is profit, liable for Corporation Tax at 20%. Prior to April 2017, 80k would incur VAT of £16k, the flat rate paid to HMRC would be £12k if the flat rate percentage was 12.5% for their sector. The difference would be £4k, or £3,200 after corporation tax.

Under the new changes, a Limited Cost Trader must use a flat rate of 16.5%, so the VAT paid to HMRC is £15,840, leaving the trader £160, or £128 after corporation tax. I can't see any small business with a turnover of £80k or less wanting to collect VAT for HMRC and file quarterly VAT returns for £128 a year.

I can see a big increase in deregistration for VAT, as it is voluntary if your turnover is below £81, and fewer new traders will register. Big business will benefit as less of their subcontractors will be charging them VAT, and the tax man will subsequently be receiving fewer VAT payments from small business, and less in corporation tax. As I said earlier, a big own goal for the tax man.

I expect the accountants on here will have a better handle on this, but I can't see any benefit in changing the current scheme.

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Steve, you are right with your calculations as regards the 'ltd cost trader' although many of my clients are simply switching to the 'standard method' of vat because the amount of input vat they can then claim (on fuel, advertising, printing & stationery, our services, equipment...) far outweighs our price for doing their vat returns.

From the HMRC perspective they wont lose out if a contractor de-reg because the 20% vat that the contractor used to charge his customer was previously deducted by that bigger business as input tax from their vat return.

HMRC dont like the fact that small businesses have actually used a scheme (FRS) to their advantage so they are making it not worthwhile - another hit to the small business.

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Steve, you are right with your calculations as regards the 'ltd cost trader' although many of my clients are simply switching to the 'standard method' of vat because the amount of input vat they can then claim (on fuel, advertising, printing & stationery, our services, equipment...) far outweighs our price for doing their vat returns.

From the HMRC perspective they wont lose out if a contractor de-reg because the 20% vat that the contractor used to charge his customer was previously deducted by that bigger business as input tax from their vat return.

HMRC dont like the fact that small businesses have actually used a scheme (FRS) to their advantage so they are making it not worthwhile - another hit to the small business.

It makes a mockery of the whole thing if costs that are excluded for the FRS can be used for the standard scheme, such as fuel, services and advertising. The whole reason for introducing the FRS was to simplify VAT accounting. I'm actually retired now, so that's the main reason I've deregistered, as I see no point in doing nil returns every quarter, although I haven't dissolved my company yet. So it looks like the main beneficiaries of this latest change to the FRS will be accountants, as more traders change over to the standard scheme, or possibly printer ink manufacturers as stationery is one of the few things not excluded as a legitimate expense on the FRS.

Edited March 27, 2017 by Steve S 60

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Yes a complete mockery as you say, although the HMRC will actually be the main beneficiary because for these 'low cost traders' many will be a bit better off on the standard scheme when compared to the new FRS % but still worse off than they were on the previous FRS %. As for us accountants dealing with small business the fee we can charge doesn't really compensate for the extra complexity/work - it has taken hours just explaining the impact etc.. to our clients. The government is hitting small business all round with this & auto enrolment pensions, the new dividend tax etc...

Edited March 27, 2017 by bbrichHIT SEND TOO EARLY!

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Yes a complete mockery as you say, although the HMRC will actually be the main beneficiary because for these 'low cost traders' many will be a bit better off on the standard scheme when compared to the new FRS % but still worse off than they were on the previous FRS %. As for us accountants dealing with small business the fee we can charge doesn't really compensate for the extra complexity/work - it has taken hours just explaining the impact etc.. to our clients. The government is hitting small business all round with this & auto enrolment pensions, the new dividend tax etc...

To be honest, I'm glad to be out of it. The general consensus among the other subcontractors I used to work with is that they are all going to deregister, because it is not worth the hassle. The government would do better to clamp down on tax avoidance by the big boys. My accountant keeps trying to sell me insurance, or a "Tax Fee Protection Service", because the government has supposedly given HMRC more staff to attack tax evasion and avoidance. I've declined, as I now have plenty of time to sit down with the taxman and go through my books, should they wish to do so.

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i'm afraid the big boys have friends in high places and can also afford to pay top level tax barristers etc.. to find legal loopholes so the HMRC attack what they see as easier targets. Hopefully wont be too long before i'm out of the whole business as well !